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Demand

Forecasting

Forecasting Defined : Forecasting is the first step


in planning. It is defined as estimating the future
demand for products and services and the resources
necessary to produce these outputs.

Uses of Forecasts
Forecasts help managers plan the productive system and also
help them plan the use of the system. Planning the productive
system involves long-range plans regarding the type of
products and services to offer, what facilities and equipments
to have, where to locate and the like. Planning the use of the
system refers to short-range and intermediate range planning
involving tasks such as planning inventory and workforce
levels, planning purchasing and production, scheduling and
budgeting.

Demand forcasting is needed for:


New facility PLanning
Production Planning
Work force scheduling
Financial planning

Forecasting Time Horizons


Short-range forecast: Has a time span of upto

one year, but usually less than 3 months.


Medium-range forecast: Has a time span from 3
months to 3 years.
Long-range forecast: Has a time span of 3 years
or more.

Types of Forecasts
Technological forecasts: Concerned with rates of

technological progress
Economic forecasts: Statements of expected
future business conditions.
Demand forecasts: Projections of demand for a
company's products or services throughout some
future period.

Objectives of Demand Forecasting


Short range objectives of demand forecasting:
i. Formulation of production strategy and policy
ii. Formulation of pricing policy
iii. Planning and control of sales
iv. Financial planning
.Medium or Long-Range Objectives:
i. Long-range planning for production capacity
ii. Labour requirements (Employment levels)
iii. Restructuring the capital structure

Steps in the Forecasting Process

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The seven basic steps


Determine the purpose (objectives) of the forecast
Select the items for which forecasts are needed
Determine the time horizon for the forecast
Select the forecasting model (method or technique)
Gather and analyse the data needed for the forecast
Prepare the forecast
Monitor the forecast

Forecasting Approaches : The two general

approaches to forecasting are : (i) Qualitative and


(ii) Quantitative. Qualitative methods consist
mainly of subjective inputs, often of nonnumerical description. Quantitative methods
involve either projection of historical data or the
development of association models which attempt
to use causal variables to arrive at the forecasts.

Overview of Qualitative Methods


1. Jury of executive opinion method involves taking

opinion of a small group of high-level managers and


results in a group estimate of demand.
2. Salesforce composite method is based on estimate
of expected sales by sales persons.
3. Market research method or consumer survey
method determines consumer interest in a product or
service by means of a consumer survey.
4. Delphi method is a judgemental method which uses
a group process that allows experts to make forecasts.

Quantitative Methods
Time series models use a series of past data to make a

forecast for the future. Time series is a time-ordered


sequence of observations taken at regular intervals over a
period of time.
Causal models incorporate the variables or factors that
might influence the quantity being forecast.

Time series models


Nave approach: A simple way to forecast in
which the forecast of demand for the next period
is assumed to be equal to the actual demand in
the current period.
Moving Average method: method that uses
an average of the n most recent periods of
demand data to forecast the next period demand.
Exponential smoothing method: A
weighted moving average method in which data
points are weighted by an exponential function.
Ft = Ft-1 + (At-1 - Ft-1)

Causal models
Trend projection
Linear regression analysis

Factors considered in selection of


forecasting method
Cost and Accuracy
Data available
Time span
Nature of products and services
Impulse response and noise dampening.